Micron Technology Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 28, 2023

There are 10 speakers on the call.

Operator

Thank you for standing by, and welcome to Micron's Second Quarter 2023 Financial Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Farhan Ahmed, Vice President, Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Thank you, and welcome to Micron Technologies' fiscal Q2 2023 financial conference call. On the call with me today are Sanjay Mehrotra, our President and CEO and Mark Murphy, our CFO. Today's call is being webcast from our Investor Relations site at investors. Micron.com, including audio and slides. In addition, the press release detailing our quarterly results has been posted on the website, along with the prepared remarks for this call.

Speaker 1

Today's discussion of financial results is presented on a non GAAP financial basis, unless otherwise specified. A reconciliation of GAAP to non GAAP financial measures may be found on our website. We encourage you to visit our website You can also follow us on Twitter at microntech. As a reminder, the matters we are discussing today include forward looking statements Regarding market demand and supply, our expected results and other matters. These forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today.

Speaker 1

We refer you to the documents we filed with the SEC, including our most recent Form 10 ks and 10 Q for a discussion of the risks that may affect our future results. Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward looking statements to conform these statements to actual results. I'll now turn the call over to Sanjay.

Speaker 2

Thank you, Faran. Good afternoon, everyone. Micron delivered fiscal second quarter revenue within our guidance range. And excluding the impact of inventory write downs, margins and EPS were also within the guidance range. The semiconductor memory and storage industry is facing its worst downturn in the last 13 years with an exceptionally weak Pricing environment that is significantly impacting our financial performance.

Speaker 2

We have taken substantial supply reduction and austerity measures, including executing a company wide reduction in force. We now believe that customer inventories have reduced in several end markets, and we see gradually improving supply demand balance in the months ahead. Excluding the impact of inventory write downs, We believe our balance sheet DIO has peaked in fiscal Q2, and we are close to a transition to sequential revenue growth in our quarterly results. We are navigating the near term difficult environment with our strong technology position, deep manufacturing expertise, Strengthening product portfolio, solid balance sheet and incredibly talented team. Beyond this downturn, we anticipate a return to normalized Growth and profitability in line with our long term financial model.

Speaker 2

Micron continues to lead the industry in both DRAM and NAND technology. We are investing prudently to maintain our technology competitiveness, while managing node ramps to reduce our bit supply and align it with demand. In DRAM, 1 alpha represents most of our DRAM bit production, and we continue to make great progress in initiating our transition to 1 beta. In NAND, 176 layer and 232 layer Now represent more than 90% of NAND bit production. We also continue to lead the industry in QLC.

Speaker 2

QLC accounted for over 20% of our NAND bit production and shipments in fiscal Q2. The Micron team's solid execution and implementation of smart manufacturing has driven superb yield enhancement across our leading edge nodes. Yields on 1 Alpha DRAM and 176 layer NAND have reached levels that are now higher than any note in our history. In addition, both our 1 beta DRAM and 232 layer NAND have reached targeted yields ahead of schedule and faster than any of our prior nodes. We are well positioned to qualify these leading edge nodes across our product portfolio and will ramp them based on customer demand.

Speaker 2

We are also making good progress towards the introduction of our EUV based 1 gamma node in 2025. Similar to our 1 alpha and 1 beta nodes, we expect this node to provide us with competitive performance, power, cost and density improvements. Now turning to our end markets. As a result of inventory adjustments across our end markets, Slowing demand growth and an extremely challenging pricing environment, revenue was down year over year in all end markets. While our industry faces significant near term challenges, we believe that the memory and storage TAM will grow to a new record in calendar 2025 and will continue to outpace the growth of the semiconductor industry thereafter.

Speaker 2

Recent developments in AI provide an Fighting prelude to the transformational capabilities of Large Language Models or LLMs such as ChatGPT, which requires significant amounts of memory and storage to operate. We are only in the very early stages of these AI technologies and potential exponential growth in their commercial use cases. As more applications of this technology proliferate, we will see training workloads in the data center supplemented with widespread influence capabilities In the data center as well as in end user devices, all of which will drive significant growth in memory and storage consumption. In data center, we believe that our revenue bottomed in fiscal Q2, and we expect to see revenue growth in fiscal Q3. Data center customer inventories should reach relatively healthy levels by the end of calendar 2023.

Speaker 2

We continue to see AI as a secular driver of demand growth in the data center. An AI server today can have as much as 8 times The DRAM content of a regular server and up to 3 times the NAND content. We are well positioned Our product roadmap includes exciting HBM3 and CXL innovations, and I look forward to sharing more details about these solutions in the future. In fiscal Q2, we expanded shipments of CXL DRAM samples to OEM customers that service enterprise, cloud Micron is leading the industry with world class DDR5 or D5 technology. We are shipping D5 in high volume to data center customers and achieved our first customer qualification for our 1 Alpha 24 Gigabit D5 Product.

Speaker 2

The latest generation of server processors, AMD's Geneva and Intel's Sapphire Rapids require D5 DRAM. Servers using these new processors will drive Higher D5 industry bid demand in second half of calendar twenty twenty three towards mix crossover with D4 in mid calendar 2024. In fiscal Q2, we also began volume production and shipments of the fastest PCIe Gen 4x4 NVMe SSD in the market. Our 9,400-176 layer performance NVMe datacenter SSD, which excels in AI and high performance computing workloads. In PCs, we now forecast calendar 2023 PC unit volume to decline by mid single digit percentage, Returning PC unit volume to pre COVID levels last seen in 2019.

Speaker 2

Although still elevated, client customer inventories have improved meaningfully, and we expect increased bid demand in the second half of the fiscal year. With our strong product lineup, we are well positioned for the ongoing industry transition to D5. Clients' D5 adoption is expected to gradually increase through calendar 2023 with D4 to D5 mix crossover in early to mid calendar 2024. In fiscal Q2, our NAND QLC bit shipment mix reached A new record for the 2nd consecutive quarter, driven by growth in both client and consumer SSDs. We qualified our Micron 2,400 SSD, the world's only 176 layer QLC SSD qualified at OEMs across the client's customer base.

Speaker 2

In graphics, industry analysts Continue to expect graphics TAM growth, CAGR, to outpace the broader market supported by applications across client and data center. Customers' inventory adjustments are progressing well, and we expect demand in the calendar second half of twenty twenty three to be stronger Then the first half. As a performance leader in graphics, we are excited to see our proprietary 16 gigabit G6X featured in the recently launched NVIDIA RTX 4,070 Ti. In mobile, we now expect calendar 2023 smartphone unit volume to be down slightly year over year. While some customers' inventories are back to normal levels, other OEMs' inventories remain elevated.

Speaker 2

In aggregate, we expect mobile customer inventory to improve through the remainder of calendar 2023, and we expect growth in mobile DRAM and NAND bit shipments in the second half of our fiscal year versus the first half. In fiscal Q2, we continued sampling and qualifying our industry leading 1 Beta 16 Gigabit LP5X receiving very positive feedback on its power, performance and quality from customers. We expect to generate revenue on this 1 beta product later this fiscal year. We showcased our leading products Earlier this month at Mobile World Congress, where we displayed 8 flagship mobile customer design wins. Last, I'll cover the auto and industrial end markets, which now represent over 20% of our revenue and contribute more revenue and profitability.

Speaker 2

Micron is the market share leader in this important and fast growing market. In fiscal Q2, auto revenue grew approximately 5% year over year. Our leadership in automotive was evidenced by several milestones in Q2. We reached a new record customer quality score, qualified the industry's first 176 layer eMMC 5 1 automotive product and began shipping the industry's first 176 layer UFS 3.1 automotive solution. We expect continued growth in auto memory demand for the second half of calendar twenty twenty three, driven by gradually easing non memory The industrial market continued to soften in Q2 As our distribution channel partners reduce their inventory levels and end demand weakened for some customers.

Speaker 2

Inventories are starting to stabilize at the majority of our customers, and we expect demand to improve in the second half of our fiscal year. In our fiscal Q2, Micron achieved advanced startup sampling and design in across automation OEMs, ODMs and integrators with our latest generation of products. Now turning to our market outlook. Our expectations for calendar 2023 industry bit demand growth have moderated to approximately 5% in DRAM and low teens percentage range in NAND, which are well below the expected long term CAGR of mid teens percentage range in DRAM and low 20s percentage range in NAND. The reduction in calendar 2023 demand from our prior forecast It's driven by an assessment of customer inventories as well as some degradation in end market demand.

Speaker 2

We expect that improving customer inventories will support sequential bit demand growth for DRAM and NAND through the calendar year. China's reopening is also a positive factor for calendar 2023 bit demand. Public reports indicate that there have been significant CapEx cuts throughout the industry and utilization rates have declined at all DRAM and NAND suppliers. We now expect that the industry bit supply growth for DRAM and NAND in calendar 2023 will be below demand growth, which will help improve supplier inventories. While the supply demand balance is expected to gradually improve, Due to the high levels of inventories, industry profitability and free cash flow are likely to remain extremely challenged in the near term.

Speaker 2

Market recovery can accelerate if there is a year to year reduction in production or in other words, Negative DRAM and NAND Industry Bid Supply Growth in 2023. In response to the industry environment, Micron has taken a number of decisive actions in fiscal 2023. First, we are further reducing our supply. We have made additional reductions to our fiscal 2023 CapEx plan and now expect to invest approximately $7,000,000,000 down more than 40% from last year, with WFE down more than 50%. In fiscal 2024, we expect WFE to fall further as we ramp 1 beta and 232 layer nodes in a capital efficient manner.

Speaker 2

We have further reduced DRAM and NAND wafer starts, which are now down by approximately 25%. As a result, for calendar 2023, we now expect Micron's year on year bit supply growth to be meaningfully negative for DRAM. We also expect to produce fewer NAND bits in calendar 2023 then in calendar 2022. Excluding the impact of inventory write downs, we expect Micron's DIO to decline sequentially going forward from its peak in the Q2. 2nd, we have made further reductions to our operating expenses Beyond the executive salary cuts and suspension of Micron's fiscal 2023 bonuses company wide, We now expect our overall headcount reduction to approach 15%.

Speaker 2

This will occur through a combination of workforce reductions, It is now largely complete as well as anticipated attrition through the remainder of the year. 3rd, Micron continues to execute to a strategy of maintaining flat annual bit share in both DRAM and NAND. While we have had to reduce price to remain competitive in the market, we have not done so in an attempt to gain share As such, share changes at customers are generally transitory. Lastly, we have taken additional steps to ensure ample liquidity. Mark will go into further detail.

Speaker 2

Micron continues to have the strongest balance sheet among the pure play memory and storage companies, and our strong liquidity will enable us to weather this downturn, while ensuring our product and technology competitiveness. I will now turn it over to Manik.

Speaker 3

Thanks, Sanjay. Fiscal Q2 results reflected challenging market conditions with continued deterioration in pricing and profitability. Total fiscal Q2 revenue was approximately $3,700,000,000 down 10% sequentially and 53% year over year. Fiscal Q2 revenue included $114,000,000 from an insurance settlement disclosed at the time we provided guidance. Fiscal Q2 DRAM revenue was $2,700,000,000 representing 74% of total revenue.

Speaker 3

DRAM revenues declined 4% sequentially with bit shipments increasing in the mid teens percentage range and prices declining by approximately 20%. Fiscal Q2 DRAM bit shipments benefited from the timing of shipments between fiscal Q1 Fiscal Q2 NAND revenue was $885,000,000 representing 24% of Micron's total revenue. NAND revenue declined 20% sequentially, With bit shipments increasing in the mid to high single digit percentage range and prices declining in the mid-20s percentage range. Now turning to revenue by business unit. Compute and networking business unit revenue was $1,400,000,000 Down 21% sequentially.

Speaker 3

On a sequential basis, cloud revenue was down, while client revenue was stable. Revenue for the mobile business unit was $945,000,000 up 44% sequentially. Mobile revenue benefited from the timing of some shipments between fiscal Q1 and fiscal Q2. Embedded Business Unit revenue was $865,000,000 down 14% sequentially. On a sequential basis, automotive markets were relatively stable, while industrial and consumer end markets experienced weakness.

Speaker 3

Revenue for the storage business unit was $507,000,000 down 25% sequentially, impacted by challenging conditions in the NAND market. Consolidated gross margin for fiscal Q2 was negative 31.4%. This result was negatively impacted by approximately $1,400,000,000 These non cash write downs, which lower the cost basis of inventory, result from projected selling prices falling below the Cost of inventory and are not the result of obsolescence. Operating expenses in fiscal Q2 were $916,000,000 down roughly $80,000,000 sequentially. We continue to aggressively manage our operating expenses and expect them to decline sequentially in both fiscal Q3 and fiscal Q4.

Speaker 3

We had an operating loss of roughly $2,100,000,000 in fiscal Q2, resulting in an operating margin of negative 56%, down from negative 2% in the prior quarter and positive 35% in the prior year. The operating loss included the $1,400,000,000 inventory write down recorded in the quarter for a 39 percentage point impact to operating margin. Fiscal Q2 taxes were $53,000,000 As mentioned in previous quarters, Despite a consolidated loss on a worldwide basis, we still have taxes payable in certain geographies due to taxable income levels Reported in those geographies. Non GAAP loss per share in fiscal Q2 was $1.91 down from a loss per share of $0.04 in the prior quarter and earnings per share of $2.14 in the prior year. Fiscal Q2 EPS included approximately $1.34 of losses from the impact of the inventory write down.

Speaker 3

Turning to cash flows and capital spending. We generated $343,000,000 in cash from operations in fiscal Q2, representing approximately 9% of revenue. Capital expenditures were $2,200,000,000 during the quarter. We expect fiscal 2023 CapEx Free cash flow was negative $1,800,000,000 in the quarter. Our ending fiscal Q2 inventory was $8,100,000,000 and reflects the impact of the $1,400,000,000 write down.

Speaker 3

Average days of inventory for the quarter was 153 days and excluding write downs, 235 days. Inventory levels and days are higher in NAND than DRAM. Our actions on supply At quarter end, we held cash and investments of $12,100,000,000 and had total liquidity of $14,600,000,000 when considering our untapped credit facility. Given macroeconomic uncertainty and the market environment, During the quarter, we bolstered our liquidity further through the addition of $1,900,000,000 of long term debt. Our fiscal Q2 ending debt was $12,300,000,000 Under a net debt position, Our net interest income moves to net interest expense in Q3.

Speaker 3

Micron's balance sheet is solid With ample liquidity, low net debt and a weighted average maturity on debt of December 2029. Now turning to our outlook for the fiscal Q3. Market conditions remain extremely challenging. However, we expect that for the rest of this calendar year, DRAM and NAND bit shipments will continue to increase and supply demand balance will gradually improve. Included in the fiscal Q3 guide is an insurance recovery.

Speaker 3

Separate and unrelated to that recognized in fiscal Q2 of approximately $110,000,000 dollars 70,000,000 of which we expect to recognize as revenue. In fiscal Q3, We expect gross margins to be negatively impacted by pricing, write down of inventory, cost of underutilization and a higher mix of NAND. On write down of inventory, our guidance assumes a write down of approximately $500,000,000 Small changes to price expectations beyond fiscal Q3 Potential variances of inventory write downs are not factored into the guidance ranges for gross margin and EPS. As market conditions remain weak, we will continue to aggressively manage our expense profile. As Sanjay mentioned, we increased our headcount reduction target to approach 15% from our previous target of approximately 10 We now expect OpEx to fall below $850,000,000 in the fiscal Q4 of 2023.

Speaker 3

For non operating items, we expect net interest expense of approximately $5,000,000 in fiscal Q3. We now project fiscal 2023 taxes to be less than $140,000,000 We expect profitability to remain extremely challenged in the near term. We do project profitability to improve sequentially Due to lower inventory write downs and free cash flow to improve slightly driven by reduced capital spend, But we forecast operating margin and free cash flow to remain significantly negative through the fiscal year. With all these factors in mind, our non GAAP guidance for the fiscal Q3 is as follows. We expect revenue to be $3,700,000,000 plus or minus $200,000,000 Gross margin to be in the range of negative 21%, plus or minus 250 basis points and operating expenses to be approximately $900,000,000 plus or minus $15,000,000 We expect tax expense of approximately $50,000,000 Based on a share count of Approximately 1,090,000,000 shares, we expect EPS to be a loss of $1.58 plus or minus 0 point 0 $7 In closing, we continue to aggressively manage through this period of challenging market conditions, Preserving our competitive technology and product positions, strong operational capability and solid balance sheet.

Speaker 3

Following this downturn, we expect to capitalize on the secular demand trends and growth in memory and storage. We believe we are close to a transition to sequential revenue growth in our quarterly results. We are focused on significantly improving profitability and returning to positive quarterly free cash flow within Fiscal 2024. We remain confident in our financial model and will continue to operate the business in a disciplined manner

Speaker 2

Thank you, Mark. We are carefully managing our business to weather this industry downturn, preserving our technology and product portfolio competitiveness and manufacturing capabilities. Micron is the leader in DRAM and NAND process technology and one of only a handful of leading edge semiconductor manufacturers in the world. Our team continues to drive new breakthroughs for our customers. Memory and storage are at the heart of systems and solutions that fuel the global economic engine, drive new efficiencies, create higher productivity and spur advances that make life better for people around the world.

Speaker 2

We look forward to a normalization of market conditions and we remain confident in the long term demand for our solutions based on the value they create across multiple end markets. Thank you for joining us today. We will now open for questions.

Operator

Certainly. And our first question comes from the line of C. J. Muse from Evercore. Your line is open.

Operator

J.

Speaker 1

Muse:] Yes, good afternoon.

Speaker 4

Thank you for taking the question. I guess, I was hoping to get your sense of how you're thinking about the shape of the recovery. Obviously, things don't look great today, but You've been through this before and we'll get through it. And so we'd love to hear your thoughts around how you think will come out of this. And given the CapEx cuts we've seen across the industry, it certainly looks like we're going to be in undersupply situation at least for DRAM in calendar 24, and curious what some of your largest customers are saying today, particularly in the data center as they start to consider This likelihood, thanks so much.

Speaker 2

Thanks, CJ, for the question. So I think we can look at the question from the demand and the supply point of view. And from the demand side, as we have indicated that we are seeing that the customer inventories are improving, While still elevated, but in aggregate, customer inventories are improving. And we do expect that The volume of shipments both for DRAM and NAND will continue to increase on a sequential basis from here on. And of course, on the supply side, you have heard actions from industry players and through various reports, you have seen that The CapEx reductions are being made as well as underutilization is being made in the industry.

Speaker 2

And that is going to be taking out a chunk of We'll take a bite at the supply in the industry. So basically, the supply trend will also begin to improve. So the demand and supply balance will gradually improve through the course of the year. We have said that inventory, We believe also days of inventory will continue to improve as well. For us, days of inventory peaked In FQ2 and exclusive of inventory adjustments, we would expect days of inventory to continue to improve from here on.

Speaker 2

We have talked about for our business that we see being close to transition to sequential growth in revenue going forward. So overall, the industry environment with the demand and supply gradually improving, we expect The trajectory of pricing also to be improving. So this then ultimately means that While the profitability remains challenged, and yes, free cash flow remains challenged, but the fundamentals of the industry are beginning to improve. And certainly, with the actions that have been taken, it could be that in 2024 timeframe that there could be shortages in the industry. But overall, Micron, I think, is taking decisive actions as we have discussed with respect to managing our CapEx, Managing underutilization in the fab, managing OpEx and really focusing on supply growth as well.

Speaker 2

And in terms of some of the market trends and the customer Trends that you've talked about, basically we have shared that PC inventories are meaningfully better and will continue to improve over the next couple of quarters. Smartphones, some customers may have high inventory versus other customers, but inventories continue to improve in the smartphone market over a couple of quarters as well. Cloud revenue for us, we think, has bottomed In FQ2 timeframe, while inventories in cloud remain at elevated levels, inventories in data center remain at elevated levels, We do expect them to improve through the course of the year toward and get to normalized levels by the end of the year as well. And in cloud, the new CPUs do drive new D5 deployment and Micron is well positioned with DDDR5 with our strong position with the product, so we think that DDR5 is also A tailwind for the cloud demand with increased memory per server content that it will be driving as well. So these are all positive trends.

Speaker 2

And while we are navigating the business with extremely challenging environment, I hope you see that Micron is responsibly managing its supply and continuing to focus on improving the demand supply environment for us. Of course, As we have said, the recovery in the industry could be accelerated if the demand if the Supply for DRAM and NAND in terms of year over year growth was negative. We, of course, have taken our actions to bring Our DRAM and our NAND supply growth for the year to be negative.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Timothy Arcuri from UBS. Your question please.

Speaker 5

Hi, thanks. I had a 2 part question. First, Sanjay, I was curious, just following on the last question, what are the lasting changes that You think that the industry is going to implement coming out of the cycle? I mean, it's been so much worse than I think any of us thought it would be. Do you think that the industry and you, I mean, certainly you, But do you think the industry is going to be more draconian about adding bit supply?

Speaker 5

Do you think you can engage customers in more given that the writing clearly is on the wall about where pricing is going to go after all this. And then I guess also then for Mark, question on the write down for May, Why keep on producing if you're going to immediately write down $500,000,000 worth of inventory? Is it that you've hit some sort of Floor in terms of utilization where you can't go below that? I'm just curious why you'd produce and you'd immediately write that down. Thanks.

Speaker 2

So I think with respect to the industry environment, you have to look at that over the course of last 3 years, The world faced once in 100 year kind of pandemic, once in multiple decades kind of Russia, Ukraine War and its impact on the economy, 40 year high inflation and its impact on the macro, and all of these really resulted In an environment that created a material dislocation in terms of the demand, the surge in demand and then the inventory adjustments that took place and resulted in a material The process of recovery with respect to the supply growth reductions, actions that are being implemented, we talked about ours Today, so this will ultimately lead to the industry to recover to healthier levels. The profitability levels in the industry today are simply not sustainable. So the demand and supply environment Has to improve in the industry. And keep in mind that before this period of last 2 to 3 years, with all these events that I just mentioned, The industry for 10 years plus had been disciplined, particularly in DRAM. So I do believe that the investments in the future that require Healthy levels of profitability and of course, supply discipline will be back and the industry will grow And particularly keeping in mind the strong demand trends, I talked about 2025 being we think will be a record revenue year for the industry, Because last 2 years have been slow demand growth in terms of shipments, we think 2024 and 2025 will be strong years That will drive strong growth.

Speaker 2

You are seeing actions on the supply side. The health of the industry will be restored in the future quarters. And no doubt that AI and we talked about generative AI, right? I mean, this is very, very early And these are the trends that ultimately really drive greater demand for long time to come For memory and storage, I mean, when you look at really the future, it equals AI and AI equals memory and Micron is Well positioned with our technology and product roadmaps to address the growing opportunities there.

Speaker 3

Yes. Tim, on your second question, we have been actively taking supply out of the market. We took utilization levels down late summer. We increased that more in the fall. And as you heard on the call today, we've taking utilization down even further.

Speaker 3

And it's we're at levels now that none of us have seen before on underutilization at Micron and maybe in the company's history. So it's a significant reduction. I'll add that we do, as you know, build principally to WIP. So we're able to Then finish those products later and minimize the amount of build. We've also very thoughtfully, When we've reduced utilization, done it in a way that we can maximize the cash benefits reductions that we get when we reduce.

Speaker 3

And then it's important to note that in the time horizon that we're looking at, we are seeing bit Volumes increase sequentially from here on out. Now in the Q3, I will note just some housekeeping that The DRAM volumes are up modestly in Q3 and NAND is up sharply, as strongly I should say. And while both are price challenged, NAND is more challenged. But Yes, we are seeing growth in bits and we expect that to is the beginning of supply demand Getting into better balance.

Operator

Thank you. Our next question comes from the line of Chris Daley from Citi. Your question please.

Speaker 6

Hey, thanks guys. Just a couple of specific questions on the expected recovery. Is your base case, I guess in terms of the PC and cell phone demand for the second half of this year, is your base case expecting those End markets to get back to normal seasonality and how should we expect utilization rates The trend as you continue to increase DRAM and NAND shipments, should we expect you to get back to full utilization rates in a couple of quarters? Or is there Some sort of revenue or bit level that you could give us that would indicate that you're back to full utilization? Thanks.

Speaker 2

So with respect to the utilization rates, of course, we will continue to monitor the industry demand and it's important for us Could continue into fiscal year 2024 as well. We'll make decisions regarding utilization as a function Again, our latest status in the future around our inventory position and assessment of demand. Regarding your question on the smartphone market, as we have said that in calendar year 2024, We expect that smartphone unit volume will decline on a year over year basis. And Q2 growth for us was above seasonal. And as customers' inventory levels Normalize over the course of the year, then normal demand trends will also be restored in the Smartphone market.

Speaker 2

And as regarding the smartphone market, even though the unit volume may be down on a year over year basis, important thing is that the Smartphone market is shifting its mix more towards flagship phones and flagship phones require More memory as well. So these are some of the trends that will play out as the demand grows Over the course of the year for in the smartphone market.

Speaker 7

Okay, thanks.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Harlan Sur from JPMorgan, your question please. Hi, good afternoon. Thanks for taking my question.

Operator

On the underutilization charges, I know last call, The team had articulated roughly $460,000,000 of charges recognized primarily in fiscal Q3 and Q4. So how much of this is embedded in your Q3 numbers and Q3 guidance? And given the lower utilization, take it down to 25% or cut it by 25%. If you continue to drive lower utilizations through the second half of this calendar year, like how do we think about underutilization charges

Speaker 3

Yes. Harlan, so I'll answer it briefly here at the beginning and then maybe take the opportunity to just Talk through gross margins and effective utilization of gross margin. So based on what we told you last Quarter, and I went into some length last quarter about the charges and period costs and so forth. But last quarter, we thought we'd have around $900,000,000 in fiscal 2023 And about $460,000,000 would hit FY 'twenty three COGS. With the underutilization that we've Stepped up here.

Speaker 3

We see now, about $1,100,000,000 in 'twenty three, And this is a combination of costs and inventory and period costs. And we actually see about $900,000,000 of that flowing and do FY2023. And that's driven by not only the increase in utilization costs, Underutilization cost is driven by the effects of the write down in the accounting or inventory write downs and the pull forward of costs. So if we step back and we look at our reported gross margin and our outlook, Yes, they're a function of many factors, including pricing, inventory write downs, which incorporate our forward view of pricing, The effects of utilization, volumes and the associated leverage on period costs as we discussed last quarter And of course, Nick, these factors are continuously changing due to the market environment and our actions. And then further, I'll add that at these lower levels of profitability, the margin forecasts and the results Are more sensitive to slight changes in assumptions, importantly, such as price.

Speaker 3

So on price, Given the recent price trends that we've seen and our current view on pricing, as we reported in Q2, We took a material write down of inventories of $1,400,000,000 And then, the Q3 guide contemplates a write down of $500,000,000 on this additional inventories produced. Yes. With these write downs, we've pulled forward inventory costs and thus we've lowered the carrying value of on hand inventories. And as this lower cost inventory clears in future quarters, we'll realize more income in those quarters than we would have without the charge. So as an example, we expect around a $300,000,000 benefit in Q3 From the Q2 charge as a portion of these lower cost inventories sell through.

Speaker 3

So as per your question, we also now have the underutilization effects creating higher cost Inventories and then adding additional period costs. And as mentioned, we see about $1,100,000,000 of under utilization impact in FY 2023 and most of that, as I mentioned, we expect to hit the P and L this year and some of it will carry over to next year. Now because of the effect of write down accounting, less of it will carry over to next Now considering all this, we expect our reported 2nd quarter gross margin to be the trough, so that 31.4 percent. And that again is driven in large part by the 1 point $4,000,000,000 write down. With a much lower inventory charge forecasted in the 3rd quarter, You see that we guided about 10 points better relative to Q2.

Speaker 3

Now again, these estimates are very sensitive to Pricing changes, but in our current view, Q4 would be better than Q3 in the sense of a lower charge, if any. And then over time, as bit volumes grow, as I talked about in the last call and we And then we'll have better utilization on the front end. And most importantly, as customer inventories continue to improve, Inventories come down and supply demand balance is better. We would expect reported margins to improve through FY 2024. But again, a lot of factors at work here.

Speaker 3

If you were to just Strip out the impairment charges or the write downs in second and third quarters, Q2 Would be a 7.3% gross margin. 3Q would be a negative 7.5% margin, so down considerably. And again, this is a function of the pricing environment and the cost of underutilization, including period costs, which again I discussed last quarter. Under this view, we would trough in the second half on gross margin, then would improve off these low levels through FY 2024. So in the end, the profile of the outlook is similar to what We discussed last quarter, though, of course, levels are lower with the pricing environment we've And the recovery is a bit delayed because of a bit lower volumes.

Speaker 3

But again, trough in the second half

Operator

Thank you. Our next question comes from the line of Toshiya Hari from Stephens. Your question please.

Speaker 8

Hi, thank you for taking the question. One question on the NAND business and market. You talked about your BIP production being down year over year in calendar 'twenty three, which I believe is a little bit more draconian than most of your competition. Just curious How you're thinking about the strategy in NAND? Could this cause permanent damage to your relative competitiveness?

Speaker 8

And kind of related to that, one of your competitors has significant capacity in China. Wondering if you had customers come to you and express concerns around that and if that could be a potential relative positive for you over the medium to long term? Thank you.

Speaker 2

So with respect to NAND, we are well positioned with our technology and product roadmap. We shared with you today that 176 layer NAND yields are doing exceptionally well. 232 layer NAND, we have begun shipping in the market already. And with 176 as well as 232 layer, we have been well ahead of Any competitor in the industry, 90% plus of our supply today in NAND that we are shipping It's 176 plus 232 layers. So overall, we are well positioned with our technology.

Speaker 2

Our underutilization actions, we really believe is what is needed to bring supply in line with demand. And we think these are the actions that are needed to restore the health of the business. And we have said, in our prepared remarks that The industry recovery could be accelerated if NAND and DRAM supply growth, production growth is negative on a year over year basis, and we certainly are taking our actions accordingly. And regarding China, I can't really comment on part of other customers. But what I can tell you is And it's our product portfolio.

Speaker 2

We have done well with leveraging our NAND and DRAM in mobile markets with multi chip packages In automotive, I talked about some of the NAND product portfolio expanding and creating opportunities To strengthen our leadership position in automotive markets and certainly in the data center market, SSDs It's also an opportunity and our Gen 4 NVMe SSDs have been continuing to do well in the client market as well. So our customers see our execution and innovation capabilities in technology and products, And that's what is bringing us stronger relationships with our customers for the NAND business. And of course, in terms of market opportunities, those continue to be healthy in terms of NAND displacing HDDs In the data center and Micron having the right products to grow those opportunities in the future, this has been We have been with NVMe SSDs in data center, we have been absent in the past, and now we have A healthy product portfolio and we look forward to growing our opportunities in that space in the future. So NAND overall In combination with DRAM enables us to have a strong differentiated value for our customers. And Micron is well positioned with our Technology and product roadmap and certainly we believe that our supply actions here are prudent.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Aaron Rakers from Wells Fargo. Your question please.

Speaker 9

Yes. Thanks for letting me ask the question. So Mark, I apologize. I just want to go back to the inventory discussion a little bit. Is there Any way to bridge the prior comment of the $460,000,000 again that Harlan had brought up relative to that?

Speaker 9

Sounds like $900,000,000 for fiscal 2023. I'm just curious on what's embedded in the gross margin for underutilization this quarter. And I guess on inventory, is there any risk of obsolescence of inventory? Or is inventory good, it just gets sold through at a lower cost of goods at this point?

Speaker 3

Yes, the inventory is still good. It just gets its the cost basis is lower on the inventories. And then as far as your question on underutilization charges, so we do have As just bridging it from what we said last time, last time we had total Underutilization charges of about $900,000,000 that were incurred in FY 2023, of which we believe that $460,000,000 would pass through to the P and L in FY 'twenty three. And that $460,000,000 was a combination of Costs and inventories are clear and then also period costs. Now our view With the increased underutilization, our view is 1,100,000,000 Of costs in FY 2023 and the amount that we believe will pass through In the second half here is $900,000,000 Again, that is a combination of Costs that are in inventory and period costs.

Speaker 3

Now, the reason it's a higher percent of the Total FY 'twenty three costs that we saw is because of this write down accounting where that those inventory charges are pulled forward. So, I hope that clears up the question.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Joseph Moore from Morgan Stanley. Your question please.

Speaker 7

Great, thank you. Sorry if I missed this and I appreciate the Detailed puts and takes on gross margin. With regards to the lower cost to market adjustment, can you walk through the mechanics of How you got to the number for the February quarter, I guess, a little over $1,400,000,000 Is that I know you pull the inventory And then you compare that to the market price, how far out in time does that market price assessment take you? And I guess to the extent that you're There's more than 1 quarter of sell through that's being adjusted. How are you making the determination of what the price will be there?

Speaker 3

That's right, Joe. You did a decent job of sort of answering the question. But if you I would refer you to Our public filings, but as a reminder, we evaluate the recoverability of inventory as a single pool. Yes, this method we've applied consistently. And as disclosed, we analyze the recoverability of our inventory based On quantities and values on hand at the end of each quarter, we project the period over which that inventory will be sold Based on our most recent forecast and consider the expected selling prices during that forecast horizon, Since the pre write down inventory days of inventory were About 2 35 days, that projection covers nearly 3 quarters.

Speaker 3

The amount by which our inventory carrying costs exceeds expected sales values Adjusted for selling expenses determines the charge. And in this case, that yielded a $1,400,000,000 write down In the Q2. And we expect that same process to result in a $500,000,000 charge End of

Speaker 4

Q3.

Operator

Thank you. One moment for our final question for today. Our next question and final question for this session comes from the line of Krishankar from Cowen. Your question please.

Speaker 2

Hey, guys. Good afternoon. This is Eddie for Chris from TD Cowen. It seems you adjusted the language Regarding your DDR4 and DDR5 crossover date from mid-twenty 24 to mid- to early 2024, So slightly better than prior outlook. It's a bit surprising given that data center inventory for DDR4 is pretty high.

Speaker 2

Is that improved outlook driven by better than expected demand for new CPUs from Intel and AMD? Or is it a function of You're seeing higher share than expected in the ER5 or is it more of data center customers buying ahead and taking advantage of low price environment? Any color regarding Daimler's outlook would be helpful. And thank you. Regarding the mix of D4 to D5 transition, The comments that I made were for the industry trends, and those have not really changed versus our prior expectations.

Speaker 2

Of course, they are function of deployment of these new CPUs, such as AMD Genoa and Intel Sapphire Rapids Into the servers, into the data center infrastructure and those and you are seeing that those CPUs are Now starting to get broadly deployed and will continue to increase through the course of 2023 2024. So our expectations in terms of Transition timing for D4 to D5 for the industry have not changed. And yes, we remain well positioned with our D5 products in the market.

Operator

Thank you. This does conclude the question and answer session as well as today's program.

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Earnings Conference Call
Micron Technology Q2 2023
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